You may use different investment techniques and strategies to maximize your returns and control cash flows as a real estate investor. One of the most important things that will entice investors is tax benefits. Tax savings strategies can help you reduce or even eliminate paying taxes on some portion of the money that you earn from rental properties.
As a result, it is important to be familiar with the different tax deductions and credits available to you as a real estate investor.
The US taxation system is complex, and there are many different deductions and credits that may be available to you. To ensure that you are taking advantage of all the tax breaks available, it is advisable to consider turning to a qualified tax preparer or accountant who can help you identify tax strategies that will save you money.
Here are some tax-saving strategies for real estate investors:
1. Keep Track Of Your Expenses
Be sure to keep track of all of your expenses related to your real estate investments. It includes the cost to purchase a property and any expenses you incur while renting it out, including insurance, repairs, and utility bills. When you sell a rental property for a profit, these expenses will help lower your tax bill. If you sell at a loss, they can offset that loss and reduce or even cancel out taxes that would otherwise be due on the sale.
2. Consider Selling Your Properties At A Loss
The president’s tax proposal would allow real estate investors who sell their property at a loss to use those losses to offset up to $3,000 in ordinary income per year. Until now, this benefit has been limited to rental real estate investors – if you sell a property that you’ve used as your personal residence, you can’t claim the loss on your taxes. If this change is approved, it could help real estate investors who face a large tax bill this year.
3. Invest In A 1031 Exchange
1031 exchange explained, When you sell a property for a profit, you generally need to pay taxes on the gains. However, if you reinvest those gains in a business or investment property, you can defer your tax bill – that is, as long as the new property is of “like-kind.” It means the property must be used for business (such as an apartment building) or held as an investment (such as commercial property). You can also use a 1031 exchange to move money from one property to another, which can be helpful if you’re looking to downsize or upgrade your real estate holdings.
4. Invest in a REIT
A REIT is a real estate investment trust, and it’s one of the best ways to invest in real estate without actually purchasing the property yourself. A REIT functions much like a mutual fund, and you can buy into it just as easily. Like other investments, your returns from a REIT may be subject to capital gains taxes when you sell – but since REITs are required to distribute at least 90% of their taxable income, you may see a bump in your returns on which you’ll owe taxes. However, these distributions can help lower your tax bill by offsetting the income you make on other investments.
5. Consider Refinancing To Defer Capital Gains Taxes
If you’ve seen big increases in the value of your real estate investments over time and want to sell them – but are facing a large tax bill this year – refinancing may be an option you want to consider. By getting a new mortgage, you can effectively push back your sale date. However, if you hold onto your property for another year or two, your tax rate may go down in the future – which could mean paying less in taxes overall.
Conclusively, if you’re a real estate investor, it’s important to keep track of all your expenses so that you can offset any capital gains with them when you go to sell. It might also be helpful to consult an experienced tax professional who can help guide you through the tax laws and ensure that you’re getting everything you’re entitled to claim.